Quantitative fundamental analysis
We are broadly positive about the major global video game publishers in light of new AI mobile technology, greater social engagement among multiple players, and a fundamental shift to higher double-digit growth rates in digital sales, profits, and capital expenditures. The major video game publishers include Activision Blizzard (now as part of Microsoft), Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), Glu Mobile (GLUU), Tencent (TME), and Japanese rivals such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco. Although the major game publishers show relatively high stock market valuation across the board, we believe both higher P/E and P/B multiples arise from historically high and steady top-line growth and further ongoing bottom-line momentum. In the meantime, we are quite mindful of the recent rapid rise, dominance, and uncertainty in association with the broader battle royale game mode (Fortnite and PUBG). This resultant global phenomenon continues to entertain more than 3 billion players worldwide.
Video games continue to take both screen time and monetization from many other forms of entertainment, such as live concerts, sports events, theme parks, movies, and TV shows. A recent Newzoo survey shows that the global video game market is likely to grow from only $115 billion in 2017 to $250 billion to $335 billion in 2024-2026. This positive growth outlook arises from double-digit growth in mobile games, high single-digit growth in console games, and low-to-medium single-digit growth in PC games on average. Over the past several years, video games have evolved dramatically with AI tools and avatars to result in greater social engagement, visual stimulation, and lower latency in comparison to legacy pre-digital video games. With significant improvements in high-performance semiconductor microchips (from Nvidia, AMD, TSMC, and most other wafer manufacturers), graphical processing units (GPU) and large language models (LLM), many video games now run at faster bandwidth speeds. Also, these video games now tend to achieve greater global reach and digital penetration in many different countries worldwide. The more socially interactive environment contributes to the recent mass-market successes and surprises in the broader battle royale game mode, especially Fortnite, PUBG, Knives Out, Rules of Survival, Garena Free Fire, and so on. New, non-obvious, and creative innovations in both game design and social media engagement substantially improve opportunities for greater social interactions and more immersive game experiences. As a result, these popular video games have become a major social outlet for consumers. Many players have fun, compete, collaborate, and then watch other gamers on platforms such as Twitch, PlayStation, X-Box, Steam Deck, iOS, Android, and so forth. From Dota, Street Fighter, and Overwatch to StarCraft to Counter Strike, Super Smash Bros, and League of Legends, Esports have become much more popular over the past few years with substantially more consumer engagement and support from many video game publishers. For the dominant video game publishers, Esports broadcast their titles, broaden their global target audiences, and further deepen their worldwide fan attachments.
Meanwhile, the major video game distributors compete with several other sources of human entertainment such as motion pictures, live concerts, TV shows, social networks, podcasts, and theme parks etc. For the major video game publishers, the secular growth in both sales and profits continues to be high, robust, and steady in the next few years. These major video game publishers face intense competition from several oligopolistic foreign rivals, especially some private companies in Japan and South Korea. In terms of competitive advantages, all of these video game publishers secure and retain well-known intellectual property franchises in their respective game specialties.
In a fundamental view, the video game industry is similar to the film business. Specifically, there are substantial barriers to entry, and these barriers to entry include capital investments in game design, AI cloud services for mobile access, licenses for special intellectual property resources such as movies, TV shows, songs, storylines, novels, and theatrical plays. These mainstream licenses often help the major video game publishers secure higher, more stable, and more predictable sales, profits, and cash flows worldwide. From time to time, however, the leaner, faster, and smaller studios sometimes come up with individual games that rapidly gain global popularity almost overnight with only word-of-mouth (but virtually few or minimal advertisements). In due time, this opportunity provides smaller studios with the mass-market potential to create surprise breakout hits. These hits can turn into new niche franchises and then can cause potential sea changes and ripple effects in the global competitive landscape. After all, creativity plays a prominent role in game features, functions, and social interactions among the gamers.
The current dominant video game publishers include Activision Blizzard, Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), and smaller video game publishers such as Glu Mobile (GLUU), Tencent (TME), and Japanese rivals and competitors such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco. In recent years, some small game publishers such as Bluehole Studio and Epic Games have become battle royale leaders with significant social-engagement sales and profits from their games, PlayerUnknown’s BattleGrounds (PUBG) and Fortnite respectively. The top-of-mind battle royale gameplay has become tremendously popular in light of the long prevalent fun elements of survival-and-shooter games in fast and furious game segments and storylines with substantially greater social engagement and immersion. The current battle royale genre blends the creative and explorative adventures of survival games with the last-man-standing gameplay of many multi-player and first-person shooters. This survival gameplay challenges each player to secure weapons, shields, and sheaths etc to fight opponents; and at the same time, each player has to avoid falling into traps outside of a shrinking safe base. In the battle royale gameplay, the ultimate winner is the last man standing on scarce and finite amounts of weapons, shields, sheaths, and several other resources.
The rapid rise of the battle royale gameplay has garnered significant attention in recent years. With the ongoing steady and remarkable momentum of Fortnite specifically, we believe most institutional investors focus more on the positive financial impact of these shooter games in the broader context of greater social engagement. With substantial capital investments over the past few years, each successful battle royale launch can provide long-term monetization across the mobile, console, and PC markets for video games. For this fundamental reason, the battle royale gameplay is not just another short-term fad. As the battle royale gameplay further attracts the younger and female demographic segments into the brave new world of video games, the resultant global phenomenon continues to expand the broader economic pie for video games worldwide.
Over the past decade, digital games have significantly grown to be the dominant part of total video game sales and profits due to the relative ease of digital downloads for many full video games. The major video game publishers further make available numerous digital treasures, accessories, live services, and other bonus contents. Global smartphone adoption can help accelerate the broader rapid growth, diffusion, and proliferation of mobile games worldwide. In terms of scale economies with respect to digital downloads, each game provides a hefty 85% gross margin in stark contrast to a 55%-to-65% gross margin for physical purchases of both console and PC games. For this reason, video games have increasingly become more digital over the past decade. In this positive light, the current digital transition continues to help improve both sales and profits across the entire global video game industry. Many video game publishers further benefit from new technological features, functions, and capabilities with in-game purchases (digital contents, avatar packs, accessories, and micro transactions etc). These in-game purchases help extend monetization capabilities well beyond the initial game purchase. The resultant online services extend the lifespan of each game by creating greater player engagement. At the same time, the longer lifespan of each game offers high-margin digital dollars to many video game publishers. These online services not only provide higher profit margins than the legacy business models, but the substantially more immersive user experiences also help digital games become the dominant sales streams. Specifically, downloadable contents and micro transactions often result in higher 60%-to-80% operating margins, in comparison to 25%-to-45% operating margins for traditional software packages. As many video game publishers continue to offer in-game purchases to professional gamers and retail consumers, the overall profit margins for video games should continue to improve in due course. The broader user adoption of Internet-connective mobile devices, especially smartphones and tablets, also helps expand the total addressable market (TAM) for mobile games. Free-to-play options, mobile games, and freemium business models tend to attract more casual potential gamers. All these product features and functions allow mobile games to be more immersive and more attractive to casual gamers, whose free-to-play preferences may differ dramatically from the technical preferences of hardcore gamers. In time, all these fundamental factors and forces help make mobile games more mainstream in the next few years. Specifically, mobile games can grow to account for more than 85% of worldwide sales and profits for the dominant video game publishers (Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO)) over the current decade. At its current growth pace, the global video game market is likely to reach $585 billion to $650 billion by 2030-2035 in accordance with the broad estimates of a recent Newzoo survey.
We structure our stock market investment thesis for the global video game industry in terms of 5 fundamental factors, forces, and considerations.
First, digital live services continue to drive higher double-digit growth in global game sales, profits, and cash flows.
Second, mobile technology continues to increase both the screen time and global reach of video games worldwide.
Third, the relatively high concentration of game franchises results from the greatest hits with intellectual property protection in movies, songs, storylines, novels, and theatrical plays, all of which create, form, and become part of our modern life culture.
Fourth, Esports have become a unique and separate game genre in terms of both worldwide popularity and screen time.
Fifth, some secular fundamental tailwinds continue to drive both P/E and P/B premiums for the dominant video game publishers in terms of their favorable stock market valuation.
Below we delve into each of these fundamental themes in support of the broader investment thesis with respect to the global video game industry. A rising tide lifts all boats. Hence, we are broadly positive on the major global video game publishers in light of new AI technology, greater social engagement among multiple players, and a fundamental shift to high double-digit growth rates in digital sales, profits, and capital expenditures. Nowadays, the dominant video game publishers include Activision Blizzard (now as part of Microsoft), Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), Glu Mobile (GLUU), Tencent (TME), and Japanese rivals such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco.
Stock Synopsis: Video games continue to take both screen time and monetization from many other forms of entertainment. - Blog - AYA fintech network platform provides proprietary alpha stock signals and personal finance tools for stock market investors.
With the ongoing steady and remarkable momentum of Fortnite specifically, we believe many investors ...
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